Economic revival key to banks’ health

Waning of banks’ confidence in extending loans is worrisome, the Reserve Bank says in its report

FILE PHOTO: CCTV cameras are seen installed above the logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai, India, February 7, 2019. REUTERS/Francis Mascarenhas/File Photo

While the Indian banking sector’s financial parameters such as bad loans and capital adequacy have shown an improvement in recent times, the overall health of banking sector will depend on revival in economic growth, the Reserve Bank of India (RBI) said in its Report on Trend and Progress of Banking in India 2018-19.

“The health of the banking sector hinges around a turnaround in macroeconomic conditions,” the report said.

The growth slowdown of the country intensified with GDP growth for the second quarter of the current financial year dipping to a six-year low of 4.5%.

The report noted that during 2018-19, the asset quality of scheduled commercial banks turned around after a gap of seven years with the overhang of stressed assets declining and fresh slippages arrested.

As a result of declining provisioning requirement, the banking sector returned to profitability in the first half of 2019-20. Besides, recapitalisation had helped public sector banks in shoring up their capital ratios.

Despite improvement in some of these parameters, the risk-averse nature among lenders was worrisome, the banking regulator said.

Credit slowdown

The slowdown of credit flow to the commercial sector in the first half of 2019-20 was evidence of the aversion to risk.

 

“In turn, this waning of confidence is weighing on overall economic activity. This is worrisome as it is taking hold at a time when the recent improvements in asset quality and profitability of the banking sector are at a nascent stage and capital ratios of public sector banks (PSBs) are shored up due to recapitalisation by the government,” the RBI said.

The report observed that capital infusion by the government in public sector banks was ‘just enough’ to meet the regulatory minimum, including capital conservation buffer. The RBI said banks’ capacity to sustain credit growth in consonance with the financing requirements of the economy will, however, warrant that capital is maintained well above the regulatory minimum, providing these banks confidence to assume risk and to lend.

Commenting that recapitalisation would be a continuous process, the RBI said said that going forward, the financial health of PSBs should increasingly be assessed by their ability to access capital markets rather than looking to the government as a recapitaliser of the first and last resort.